- Introduction
Daily cross border transactions, money transfers from one country to another and investments abroad are natural outcomes of the globalization. Faced with rapid expansion of global commerce, national regulators are compelled to keep a close eye on the developments in commercial transactions and accordingly, each country adopts new regulations or amends existing ones from time to time, as circumstances and the most preferred transaction types may necessitate. In this context, the grant of intercompany loans to foreign group companies is one of the areas that the Turkish regulators specifically focus on.
Under Turkish laws, the rules regarding intercompany loans sent from Turkey to foreign group companies abroad, are mainly regulated by the Communiqué No: 2008/32-34 Regarding the Decree No.32 on Protection of the Value of Turkish Currency (“Communiqué”), the Capital Movements Circular introduced by the Central Bank of the Republic of Turkey dated May 2, 2018 (“Circular”) and the Turkish Commercial Code numbered 6102 (“TCC”).
In this article, we will touch upon the requirements for Turkish entities in their extension of loans to the group companies abroad, as stipulated by the different legislative instruments.
- Granting Intercompany Loans within the scope of the Communiqué
The Decree No: 32 on Protection of the Value of Turkish Currency constitutes the basis for the Circular. Article 11/12 of the Communiqué explicitly sets out that Turkish entities may grant loans, denominated in foreign currency or Turkish Lira (TRY), to the partnerships in which they hold shares, their parent companies or group companies abroad. On the other hand, the Communiqué does not provide any further provision on the matter and the specifics are elaborated under the Circular.
- Granting Intercompany Loans within the scope of the Circular
In its first paragraph, Article 48 of the Circular repeats the wording of Article 11/12 of the Communiqué, allowing Turkish entities to grant loans abroad in foreign currency or Turkish Lira, where the borrower is (i) the partnerships in which they hold shares, (ii) their parent companies, or (iii) their group companies.
One of the noteworthy requirements of the Circular is that loaned funds must be transferred to the borrower abroad, via banks. In line with this, before transferring the loan, the lender should submit to the bank a copy of the loan agreement, and the relevant trade registry records evidencing that the borrower company located outside Turkey is a subsidiary, group company or parent company of the Turkish lender entity.
Article 48 of the Circular also states that such intercompany loans shall not bear the characteristics of renewable or revolving loans. Consequently, the term and interest rate of the intercompany loan must be definite and set out in the loan agreement.
Last but not least, following a wire transfer from a Turkish entity to its subsidiary, group company or parent company, if any amount is sent back to the bank account of the Turkish entity with an explanation of “loan repayment,” the relevant Turkish bank has to treat the transaction as a loan and check whether the loan is in line with the requirements of the Circular. If the bank determines that the loan had not been granted in accordance with the Circular, it has to notify the Ministry of Treasury and Finance regarding the transaction.
- Granting Intercompany Loans within the scope of the TCC
As per the Article 358 of the TCC, the shareholders cannot be indebted to a joint-stock company unless (i) the shareholders have fully performed their share capital commitments that have become due and payable, and (ii) the profits of the Turkish entity, together with its free reserve funds, are sufficient to cover the losses of the previous years. Article 644 of the TCC provides that Article 358 shall be applicable for limited liability companies, as well.
It is also important to note that the foregoing prohibition on indebtedness provisions shall be taken into consideration if the borrower has direct shareholding in the relevant lender Turkish entity. Otherwise, provisions of the TCC will not apply, if there is no direct shareholding relationship between the Turkish entity which will grant a loan and the borrower group company and/or parent company.
- Conclusion
As explained above, it is technically possible for a Turkish entity to extend a loan to a company abroad, provided that it is a subsidiary, parent company or group company of the lending Turkish entity. To sum up the statutory requirements, (i) it is mandatory to send the funds via bank transfer, and (ii) to submit certain documentation to the bank before transferring the loan. The loan may be paid in Turkish Lira (TRY) or foreign currency (e.g., EUR, USD) as the case may be. Also, if the borrower has direct shareholding in the relevant Turkish entity, there must be no overdue debt arising from share capital commitment of the borrower and the profit of the Turkish entity along with its free reserve funds must be sufficient to cover the losses arising from the previous years. On a side note, conditions of the intercompany loan must be in line with the market practice especially in terms of the term and interest rate and, the intercompany loan should not give unfair advantage to the foreign group company. Lastly, it would be advisable for the authorized corporate bodies of both the lender and borrower entities, to adopt resolutions with respect to the loan facility before executing the agreement, for good corporate governance and record keeping purposes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
